Conditioning Variables and the Cross-section of Stock Returns PDF Download
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Author: Wayne E. Ferson
Publisher:
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 45
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Book Description
Previous studies have identified predetermined variables that have some power to explain the time series of stock and bond returns. This paper shows that loadings on the same variables also provide significant cross-sectional explanatory power for stock portfolio returns. These loadings are important, over and the above the variables advocated by Fama and French (1993) in their three factor model, ' and also the four factors of Elton, Gruber and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The lagged variables reveal information about the cross-section of expected returns that is not captured by popular asset pricing factors. These results carry implications for risk analysis, performance measurement, cost-of-capital calculations and other applications
Author: Wayne E. Ferson
Publisher:
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 45
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Book Description
Previous studies have identified predetermined variables that have some power to explain the time series of stock and bond returns. This paper shows that loadings on the same variables also provide significant cross-sectional explanatory power for stock portfolio returns. These loadings are important, over and the above the variables advocated by Fama and French (1993) in their three factor model, ' and also the four factors of Elton, Gruber and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The lagged variables reveal information about the cross-section of expected returns that is not captured by popular asset pricing factors. These results carry implications for risk analysis, performance measurement, cost-of-capital calculations and other applications
Author: Wayne E. Ferson
Publisher:
ISBN:
Category :
Languages : en
Pages : 60
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Book Description
Previous studies have identified predetermined variables that have some power to explain the time series of stock and bond returns. This paper shows that loadings on the same variables also provide significant cross-sectional explanatory power for stock portfolio returns. These loadings are important, over and the above the variables advocated by Fama and French (1993) in their three factor model,' and also the four factors of Elton, Gruber and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The lagged variables reveal information about the cross-section of expected returns that is not captured by popular asset pricing factors. These results carry implications for risk analysis, performance measurement, cost-of-capital calculations and other applications.
Author: Kevin Q. Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
Empirical research on conditional asset pricing has been built on several standard return-predictive variables. However, recent studies have raised serious doubts on these variables that typically serve as the instruments to capture the relevant conditioning information. In the stochastic discount factor framework, we propose and implement a new approach to assess the value of the standard instruments. We compare the out-of-sample performances of conditional models that are built on different subsets of several widely-used instruments. We find that some combinations of these instruments, after adjusting for the effect of the horse-race over all the subsets, can significantly improve the out-of-sample performance for pricing the cross-section of stock returns. In contrast, some other subsets give rise to conditional models that drastically underperform the unconditional model. The results affirm the value of the conditioning instruments for cross-sectional asset pricing and highlight the importance of instrument selection.
Author: Yong Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
We run a horse race among eight proposed factors and eight proposed conditioning variables for explaining the cross section of stock returns. The purpose is to better understand which factors, in combination with which conditioning variables, seem robust in explaining cross-sectional data, and to seek an economic interpretation of the specifications that appear most promising. We find that a consumption growth factor, conditioning on lagged business income growth, is the most successful in explaining cross sectional variation of average quarterly returns in the 25 Fama-French portfolios.
Author: Min Liu
Publisher:
ISBN:
Category : Investment analysis
Languages : en
Pages : 72
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Book Description
Author: Yong Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 139
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Book Description
Many factor models, with a variety of conditioning variables, have been proposed to explain cross-sectional returns. In chapter 2, we run a horse race among several proposed models. The purpose is to better understand which factors, in combination with which conditioning variables, explain the cross section of returns better, and to seek an economic interpretation of the specifications that appear most promising. We find that a consumption growth factor, conditioning on lagged business income growth, is the most successful in explaining cross sectional variation of average quarterly returns in the 25 Fama-French portfolios.
Author: Vinod Chandrashekaran
Publisher:
ISBN:
Category :
Languages : en
Pages : 256
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Book Description
Author: Nathaniel Light
Publisher:
ISBN:
Category :
Languages : en
Pages : 70
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Book Description
We propose a new approach for estimating expected returns on individual stocks from a large number of firm characteristics. We treat expected returns as latent variables and apply the partial least squares (PLS) estimator that filters them out from the characteristics under an assumption that the characteristics are linked to expected returns through one or few common latent factors. The estimates of expected returns constructed by our approach from twenty six firm characteristics generate a wide cross-sectional dispersion of realized returns and outperform estimates obtained by alternative techniques. Our results also provide evidence of commonality in asset pricing anomalies.
Author: Hui Guo
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
Consistent with the post-1962 U.S. evidence by Ang, Hodrick, Xing, and Zhang [Ang, A., Hodrick, R., Xing Y., Zhang, X., 2006. The cross-section of volatility and expected returns. Journal of Finance 51, 259-299.], we find that stocks with high idiosyncratic variance (IV) have low CAPM-adjusted expected returns in both pre-1962 U.S. and modern G7 data. We also test in three ways the conjecture that IV is a proxy of systematic risk. First, the return difference between low and high IV stocks -- that we dub as IVF -- is a priced factor in the cross-section of stock returns. Second, loadings on lagged market variance and lagged average IV account for a significant portion of variation in average returns on portfolios sorted by IV. Third, the variance of IVF correlates closely with average IV, and the two variables have similar explanatory power for the time-series and cross-sectional stock returns.
Author: Donald B. Keim
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
A growing number of empirical studies suggest that betas of common stocks do not adequately explain cross-sectional differences in stock returns. Instead, a number of other variables (e.g., size, ratio of book to market, earnings/price) that have no basis in extant theoretical models seem to have significantly predictive ability. Some interpret the findings as evidence of market efficiency. Others argue that the Capital Asset Pricing Model is an incomplete description of equilibrium price formation and these variables are proxies for additional risk factors. In this paper we review the evidence on the cross-sectional behavior of common stock returns on the U.S. and other equity markets around the world. We also report some new evidence on these cross-sectional relations using data from both U.S. and international stock markets. We find, among other results, that although the return premia associated with these ad hoc variables are significant in most international stock markets, the premia are uncorrelated across markets. The accumulating evidence prompts the following question: If these return premia occur primarily in January and are uncorrelated across major international equity markets, is it reasonable to characterize them as compensation for risk?
